The International Swaps and Derivatives Association (ISDA) is undergoing a multi-year digital transformation initiative to standardise, automate and digitise key processes and documentation in derivatives markets. In a DerivSource Q&A ISDA’s Mark New, co-Head of Digital Transformation and senior counsel and Olivier Miart, co-Head of Digital Transformation, discuss how ISDA’s digital transformation initiatives can boost reporting for upcoming rewrites and help members prepare for a torrent of new reporting requirements in 2024.
Regulators around the world are changing derivatives reporting rules to incorporate new data elements and to improve the consistency and accuracy of reported data across jurisdictions. The US Commodities and Futures Trading Commission (CFTC) introduced an initial batch of amendments to swaps data reporting rules in December 2022. In 2024, Japan and the EU will see new rules go into effect in April, followed by the UK in September, and Australia and Singapore in October.
Q: What are the most significant challenges for ISDA members as they contend with these various changes in different jurisdictions?
New: The timing of the rule changes creates challenges, particularly for firms that are active in multiple markets. With five sets of rule changes occurring in a matter of months, this will stretch global firms’ resources.
In addition, although this is a global initiative with much more consistency between rules than in the past, the rules are not identical – which adds to the workload. Regulators are not implementing the exact same subset of critical data elements for their reporting regimes. Each jurisdiction includes several additional data fields, some of which may be unique to that jurisdiction. Firms cannot simply take what they have done for one jurisdiction and copy and paste it for another. They must tweak their systems and processes for each regulatory jurisdiction.
Q: How is ISDA positioning itself to assist members with compliance?
Miart: ISDA’s mission is to bring standardisation and offer standard data formats and solutions that benefit the industry at scale, where it makes more sense for the industry to come together and benefit from a mutualised solution than for every firm to develop their own. ISDA’s Digital Regulatory Reporting (DRR) initiative is made in that spirit.
ISDA launched the DRR in 2021, and it went into production with the CFTC reporting rule rewrites in 2022. The DRR allows firms to access a consistent interpretation of the CFTC amendments developed and agreed by peers as part of an industry working group. Using the Common Domain Model (CDM), this mutualised interpretation is available as open-access, human-readable and machine-executable code. Firms can use that code to check whether their interpretation of the rules is consistent with what has been agreed at the industry level or use it directly as the basis of their implementation. This guarantees data validity and consistency across the industry and avoids the sorts of discrepancies that occur when every firm tries to independently interpret what the regulators want to see.
This creates significant efficiency for reporting firms, but it also helps regulators, which receive consistent and accurate data that can be aggregated without the need for data cleansing.
Some firms will initially use the DRR as a control function to run in parallel with their own reporting and to show their implementation is consistent with the industry agreed version. Over time, we expect them to migrate towards full implementation.
New: The DRR is a great example of how we can leverage work we have done previously to help firms mutualise the process of understanding and interpreting regulatory requirements, but to make that available as implementable code. It gives us a new level of granularity in the way we can help firms mutualise their understanding of these regulations.
Q: Given there are so many deadlines across the globe, how does ISDA plan to educate and support its members?
Miart: ISDA is finalising the DRR code for rule changes in Japan and under EU-EMIR and is starting to work on code for rules developed by the Australian Securities and Investments Commission (ASIC), the UK’s Financial Conduct Authority (FCA) and the Monetary Authority of Singapore. The focus will then turn to Canada and Hong Kong later in the year. For each jurisdiction, the code is reviewed and validated by a steering committee of industry participants, so it is ready for the start of user acceptance testing (UAT) for the relevant trade repository.
ISDA assists firms during the UAT phase with any code amendments that need to be made to be ready for the go-live date for each reporting requirement. This requires a staggered approach, as there is overlap in the implementation work across jurisdictions. Fortunately, there is some commonality in the requirements in different rule sets, so some of the code developed for one jurisdiction can be used elsewhere. This offers some economies of scale, but there are also always some requirements that need to be developed from scratch.
Q: What other initiatives are part of your digital transformation strategy?
New: ISDA has a number of digital offerings. The goal is to bring them under one roof, align them and make sure they are working together, and ensure we are collaborating with ISDA colleagues in different policy areas and identifying the right use cases and value of our products. We believe in the value of mutualising tasks where there is no real competitive advantage from going it alone. In the digital world, we can take this to another level compared with traditional working group discussions. Rather than written descriptions of agreed interpretations, we can produce implementable code that directly records what was agreed.
“We believe in the value of mutualising tasks where there is no real competitive advantage from going it alone. In the digital world, we can take this to another level compared with traditional working group discussions. Rather than written descriptions of agreed interpretations, we can produce implementable code that directly records what was agreed.” – Mark New, ISDA
Aside from the DRR, there are many things that can be done using the CDM. There are potential uses cases in collateral – the CDM provides the ability to record information about collateral eligibility and how collateral can be used in trading relationships. As the underlying standard for financial products, trades in those products and the lifecycle events of those trades, the CDM can be used to build other use cases.
In addition, we developed ISDA Create, an online platform used to negotiate and execute important agreements that firms need to put in place before they can start trading derivatives. That platform allows firms to speed up the negotiation process and export the data downstream to trading, risk and collateral systems.
Digitising our documentation is another major focus for ISDA. Over the past few years, ISDA has been developing a digital platform called MyLibrary, which allows users to access our documents in a digital format. This makes it much easier for firms to navigate these quite detailed and dense documents. It also solves a longstanding problem of how to identify the exact terms of a trade when it was executed. That used to be quite challenging because updates and revisions to our definitions used to be achieved by publishing separate supplements. MyLibrary allows new versions of the documentation to be published in full each time a revision is made, and users can easily search by date to find the terms that were in effect at that time. Right now, ISDA is focused on adding legacy documents to MyLibrary and we’re using machine learning (ML) and artificial intelligence (AI) to speed up the process.
ISDA is bringing all these various platforms under one roof to ensure they are well aligned and that members understand the different benefits of the various solutions and the value of adopting them.
Q: ISDA recently created the digital transformation arm – combining both legal and digital knowledge and expertise. How does merging these capabilities add value for members?
New: One example of how legal and digital expertise can complement each other became apparent during the Covid crisis. When firms want to close out derivatives transactions under the ISDA Master Agreement, they are required to deliver a notice to start the process using the contact details listed in the agreement. However, this became challenging during the pandemic when offices were closed. That led to uncertainties over whether those notices were effectively delivered, which in turn can have an impact on valuations—an important issue for firms.
ISDA would like to create a centralised industry notices hub—an electronic platform that allows parties to send notices instantaneously with the confidence that their counterparties on the platform have agreed to receive notices this way. That would avoid the need to keep bilateral agreements up to date with the latest contact details, and provide certainty that notices were received.
ISDA is currently talking to members about this to gauge industry demand and ensure we address any legal issues before moving ahead with development.
Q: What is next for ISDA in 2024?
Miart: The motto with regards to digital transformation is align, advance, adopt. We need to be aligned internally to ensure we collaborate and approach solutions in a consistent manner, and we want to make sure everything we do has the members’ backing and commitment that they will implement the solutions we build for the industry. ISDA is bringing together the different platforms across its legal, capital and infrastructure functions and we want to ensure we cover every single aspect of every single product in a coordinated and centralised way.
“The motto with regards to digital transformation is align, advance, adopt. We need to be aligned internally to ensure we collaborate and approach solutions in a consistent manner, and we want to make sure everything we do has the members’ backing and commitment that they will implement the solutions we build for the industry.” – Olivier Miart, ISDA.
The second part is how we advance our existing solutions by developing new functionality and features where necessary, based on feedback from industry participants. We want to ensure our current products do not stand still but evolve in response to industry needs – and we want to be honest when a product reaches maturity and it is time to replace it with something else.
Everything ISDA does has the members’ backing, but it is important to make sure they understand the cost to fully implement what they suggest we develop for the industry. It requires a heavy lift to replace a legacy system or to implement a new solution across a large group, and potential users need to commit before ISDA invests to create the solution.
ISDA recently hired a new Head of Solutions Adoption, Ankit Jain, whose role is to focus on marketing and understand the appetite from the industry for solutions that will help them cut costs and mitigate risk and promote their adoption.
Additionally, ISDA will host various educational events in 2024, including at the Annual General Meeting (AGM) in Tokyo, where members can come together to actively collaborate on ongoing developments that meet industry needs.
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